Refiners see backyard battles ahead: AFPM

As federal regulations appear to be easing under the new administration the US refining industry is finding new challenges on the state and local level.

President Donald Trump's election in November upended years of federal policy refiners viewed as a common, hostile foe. Executives at the American Fuel and Petrochemical Manufacturers' annual conference this year said the US government no longer poses an existential threat to their businesses, and they are optimistic about a new national regulatory regime.

Refiners instead see intensifying niche opposition at the state and local levels. That's where company interests split, industry communication has been poor and opponents are now better organized and better financed.

"It is going to get fought city-by-city, county-by-county and state-by-state," Phillips 66 chief executive Greg Garland said today in a breakfast address at the conference in San Antonio. "We have got to think about this differently, on how we engage."

Phillips 66 sees signs of this new battle front across the country. Activists drew months of headlines in their fight against the Dakota Access Pipeline in which the company is a joint venture partner. County regulators in California were persuaded to deny rail infrastructure the company needs to improve crude supply to its 120,000 b/d San Francisco refining complex. And opponents shouted down supporters in hearings on the 163-mile second phase of the Bayou Bridge pipeline moving crude from Lake Charles to St James in Louisiana.

Phillips 66 was not alone in facing more local friction. Opposition to the 155,000 b/d refinery in Torrance, California, carried over from ExxonMobil to new owner PBF Energy last year. Local regulators have considered requiring changes to a process unit that would require hundreds of millions of dollars of spending.

And US independent refiner Tesoro still waits — more than three years into the process — for a determination from Washington regulators on its 360,000 b/d Vancouver Energy rail transloading project. City officials have also objected to a modernization project at Tesoro's Los Angeles complex that air regulators had hailed as an improvement for emissions.

Real optimism has emerged for federal regulations that protect the environment without driving out liquid fuels, chief executive Greg Goff said on the conference sidelines. But that movement did not trickle down through the states.

"I just do not see that much change there," Goff said.

Federal regulatory change still holds massive sway over industry's strategic and capital decisions. The administration's ultimate approach to fuel efficiency standards for automakers could determine whether and when new engines will demand more octane, for example, a finding that will shift both high-octane ethanol blending and petroleum-based octane unit strategies. Marathon Petroleum earlier this year said it was slowing consideration of a planned octane-boosting alkylation project in part because of the federal review of fuel efficiency standards.

AFPM does not want a gutted Environmental Protection Agency or Chemical Safety Board, nor a patchwork of regulations across the 50 states, group chief executive Chet Thompson said. The industry needs regulations it has a fighting chance to achieve.

"When I say we want regulatory reform, that is not because we want to shirk our responsibilities," he said.

AFPM's top federal priority — the repeal of US biofuel mandates — already exposed fault lines in the industry, as refiners including Valero, CVR Energy and HollyFrontier have sought changes endorsed by AFPM but considered a distraction by other peers.

Refiners will need common messages and strategies to win over the public. But the preference among refiners to say little more than what financial or regulatory laws require has won few mainstream allies, executives said.

"It is important that we talk to regulators, officials and policy makers, but we also have to reach out and hit that persuadable middle," Garland said. "We have a really good story to tell — it is time for us to do a better job of telling it."